A partnership inherently carries with it significant legal and financial exposure, especially if it’s not underpinned by a clear written agreement.

It may surprise you to learn that those operating a general partnership in England or Wales without a formal document are governed entirely by the Partnership Act 1890. This was written in a completely different era of commerce, making it as ambiguous as it is outdated. This leaves your business vulnerable in ways you might not realise until it’s too late.

Even as SMEs continue to grow across the UK, the number of registered partnerships has fallen by nearly 20% since 2010, according to figures from the Department for Business and Trade. Some business owners are opting to steer clear due to concerns over liability and complexity. However, with expert legal support, partnerships can remain a flexible, tax-efficient and collaborative model, so long as they are structured correctly.

Here’s why a professionally drafted partnership agreement isn’t just helpful – it’s essential for business owners in 2025 and beyond.

1. Equal profit-sharing, even when contributions aren’t equal

Under the Partnership Act 1890, profits and losses are automatically split equally, regardless of who contributed what. Whether one partner has invested more capital, shouldered more risk, or simply works longer hours, the default rule makes no distinctions and curries no favours.

Conversely, a partnership agreement allows you to allocate profits fairly and transparently, in a way that reflects the actual input and responsibilities of each partner. This creates clarity, dispenses with confusion and ensures that your input and output are clearly defined in a way that can diffuse tension and avoid disputes down the line…

2. No built-in process for resolving disputes

Without a formal agreement, there’s no roadmap for handling disagreements. Disputes about the direction of the business, finances, or workload can become incredibly destabilising, or even fatal, to many a partnership.

An iron-clad agreement can specify how decisions are made, what happens in deadlock situations, and how conflicts are resolved, including the use of mediation or arbitration. This helps avoid expensive emotional breakdowns in professional relationships as business develops and circumstances invariably evolve.

3. Any partner can dissolve the business at any time

One of the most overlooked dangers of operating without an agreement is that any partner can legally dissolve the entire business at any time, without notice or even consent. At any moment, one partner could bring operations to an abrupt halt, freezing bank accounts, and leaving you scrambling to salvage assets against the clock.

A bespoke agreement categorically ensures continuity, with exit procedures clearly defined at every stage in your partnership; protecting everyone involved from unwanted surprises.

4. No provisions for retirement, death or succession

If a partner dies, retires or becomes incapacitated, the default law kicks in. This automatically dissolves the business unless otherwise agreed in writing beforehand. This can lead to asset liquidation (meaning the business and assets must actually be distributed to the partners) which, in turn, can lead to business interruption, and disputes with beneficiaries or family members, which is likely to make a difficult time all the more challenging.

A formal agreement allows you to plan for these eventualities, putting in place clear succession pathways and continuity strategies to safeguard your future.

More flexibility – but more personal risk

The appeal of partnerships lies in their simplicity and flexibility. They’re easy to set up, require less ongoing administration than a limited company, and offer freedom in how the business is run and structured. There’s no requirement to file annual accounts or confirmation statements, and taxation is straightforward by means of self-assessment.

It should be noted, however, that this ease comes at a cost: joint personal liability.

This is because a general partnership is not a separate legal entity; instead, all partners are personally responsible for business debts. If one partner makes a mistake, you could be on the hook for an unspecified sum. Crucially, this includes your personal assets, such as your house or savings.

A partnership agreement can’t eliminate this risk entirely, but it can and will mitigate it by setting boundaries, outlining responsibilities, and reducing uncertainty. In this sense, this unwavering peace of mind and utmost clarity is one of the most valuable elements to forging any lasting business partnership.

A modern business deserves modern legal foundations

The Partnership Act 1890 may still be on the statute books, but it simply wasn’t written with today’s commercial realities in mind. It fails to account for limited liability, exposure to unsanctioned, reckless or fraudulent behaviour that one partner could expose another to without his or her knowledge and, perhaps most worrying, has no provision for clarifying intellectual property attributions, which is a must in contemporary business.

A robust agreement, drafted with support from a solicitor, can override these outdated provisions and give your business the structure it needs to succeed. Whether you're a farming partnership managing seasonal income or a professional services firm preparing for long-term growth, a written partnership agreement is critical to doing business.

Some of the key questions your agreement should cover include:

• How are decisions made?
• How are assets and profits shared?
• What happens if a partner retires, dies, or is declared bankrupt?
• How are disputes resolved?
• What are the rules for bringing in new partners?
• Are there any provisions for leave, sickness or maternity?

Don’t let 19th-century law define your future